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Oil Prices Lower; Overhang and OPEC Uncertainty Weigh

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November 10, 2016

By Jenny W. Hsu

Oil prices moved lower in Thursday morning Asian trade as investors shifted their attention back to the lingering supply overhang and concerns that major oil producers can deliver an effective deal to rein in production.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $45.04 a barrel at 0244 GMT, down $0.23 in the Globex electronic session. January Brent crude on London's ICE Futures exchange fell $0.11 to $46.25 a barrel.

Oil prices, along with global equities and other commodities, were volatile after Republican candidate Donald Trump pulled a stunning upset in the U.S. presidential race on Wednesday. Prices sank to month lows but risk-aversion sentiment soon ebbed, followed by a rebound.

"Investors have brushed aside the shock of the Trump victory in the U.S. election and surged higher," said ANZ Research. However, with many of his policy measures still unknown, volatility is expected to be high in the coming days, it said.

A Trump presidency could spell lower oil prices for longer given his strong support for U.S. frackers. The president-elect has favoured plans to lift restrictions on tapping energy reserves, approve the Keystone XL pipeline, and cancel billions in payment to the United Nations climate-change programs. The move will likely buoy crude production in the U.S., analysts said.U.S. crude production is already on an uptrend as producers are eager to capture the rising prices. The Energy Information Administration this week raised the forecast on U.S. crude output, saying production would fall slower than expected, led by a ramp-up in drilling in west Texas.

The agency now expects U.S. oil output to average 8.84 million barrels a day this year and 8.73 million barrels a day next year, up from its earlier forecasts of 8.73 million in 2016 and 8.59 million in 2017.

In the week ended November 4, U.S. crude inventories rose by 2.4 million barrels. Production also rose by 170,000 barrels to 8.7 million barrels a day, according to the latest EIA data.

Some analysts say crude demand growth might also be at risk. With Mr. Trump and his party critical of international trade, "uncertainty may act as a drag on important economies in Latin America and Asia," said consultancy FGE.

Going forward, the oil market will look to the Organization of the Petroleum Exporting Countries for direction. The cartel is set to meet on Nov. 30 to approve a plan to cap the group's production to between 32.5 to 33 million barrels a day.

However, skeptics say even if an agreement is achieved, enforcement of individual production quotas would be weak. Furthermore, with many key producers already pumping close to peak capacity, freezing at this levels won't help abate the overhang anytime soon.

"With record October output from both Russia and OPEC producers already pushing back the calendar on when the global market might rebalance," said Tim Evans, a Citi Futures analyst.